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Monday, May 2, 2016

Sound Money

All I hear and read from
libertarians is that we need sound money, and specifically our money to be
based on gold.

Note: Eric is asking about gold as money in the context of
libertarian discussion.

To me, the gold standard is totally
overrated. It would expressly require force that violates the NAP.

Eric is quite correct – in the theme of this line of
discussion, I would say he is 100% correct!

Why do
libertarians hold the gold standard so closely?

As libertarians, I do not understand why either.As Austrians?I will come to this later.

Money should be whatever people
deem as money, whether it is tied to gold or rice patties or nothing.

Eric is 100% correct again.That somewhere back in time some people chose gold, or that gold has
demonstrated its effectiveness as good money is a secondary (and irrelevant)
issue to the question at hand.

Eric offers one example of competition in money and
currency.My intent is not to address
his specific example, but more importantly the aspect of competition.In this, Eric
comes to the right answer:

The competition that would ensue
for the “best currency” would be fantastic, and a boon to the common man.

Competition is the
key.

I’ve been told I am crazy by many
people who are in fact crazy (those that believe in government)...

Eric, there is no shame in this; I have been told I am crazy
by many people who don’t believe in
government.

…but I needed to ask a non-crazy,
like you [Walter], if this idea is, in fact, crazy.

Walter does not answer the question, instead sending Eric a
reading list.I am familiar with some –
but not all – of the items listed.My
guess?None of these will address Eric’s
question, at least based on my experience of reading dozens of articles, books,
etc., on this topic.

Libertarian theory is the non-aggression principle based on
private property – and in this discussion, respect for contract (inherent in “private
property,” but worth noting).What might
be derived from this on the topic of “good money and currency”?Nothing more than “money is whatever two or
more people decide.”

Nothing.

One-hundred percent gold requires the initiation of
force.What if two or more decide on
silver (recognized as an alternative even by some proponents of gold)?What if two or more decide on a currency
backed by 40% gold?Ten percent?Half gold and half silver?

What objection, in libertarian theory, can be raised to stop
them?

None.

Now…what about the objections from some corners of the
Austrian world (including my favorite corner)?

To my knowledge, Austrian economic theory is by far the most
consistently free-market economic theory to be found.Austrians accept free markets and competition
in all facets of economics.Why not when
it comes to money?

Gold offers sound money.Competitive money in a free market offers the soundest money – and more
sound than a requirement for a 100% gold-backed money.For an economist to suggest otherwise calls
into question the entire belief in free markets.

(In a free-market, there will even be fractional-reserve
banking…but that is a different topic entirely.)

Update: Mike Rozeff has offered a reply or two to Block; a very good example is here.

Hmmm, let me put it this way, I truly don't know of a prominent libertarian that is for gold being made money on a "forced/coerced" basis- if you are aware of one it might be good to note it for illustrative purposes.

It doesn't seem apparent to me that the question, if put to Block is "Do you believe in forcing gold as a money on unwilling participants?" that the answer would be affirmative. As you note, "Walter does not answer the question, instead sending Eric a reading list."

It would seem a basic incongruity with libertarianism itself if a libertarian said, "Yes."

(as a sidenote, years ago, early in my disovery of libertarianism via Ron Paul, then through Lew Rockwell.com, via the NYT's of all places- I asked Block a question on "money" and received a similar reply to Eric. This was circa 2006, I mistook it for a "form letter" response...lol

@ Matt

"Would legal tender be so terrible if there wasn't a central bank manipulating interest rates, and banks were not operating on a fractional reserve basis? "

The issue at hand is one of whether any transaction is voluntary or not IMO.(from a libertarian perspective)

Forcing people to accept a currency, even if that currency is "sound"(subjective), appears anti-libertarian on the surface.(granted, I haven't spent a lot of time considering where it might not be)

I failed to answer your question in my response(my apologies- I'm a bit scatter brained today)..."no" in the answer.

I do feel like Block, assuming he's against coerced currency, possibly should.

Block might think this is self-evident in his defense- but if the intended audience he's writing for are those seeking to understand libertarianism, and he's trying to convince them and be logically consistent such a "disclaimer" might be helpful.

Cryptocurrencies are doing fairly well as competitors to fiat money. The little I've read on this in libertarian and Austrian circles seems overly negative. They apparently don't like the need to exchange them for fiat money to purchase from fiat based companies. This seems like a minor issue to me, especially considering the same rule applies to all currencies when used for international transactions. Some black market sellers are starting to list prices directly in bitcoin as well.

I've never understood the "Must be Gold or it's bad" argument either, at least from a Libertarian vantage point. In the newsletter's I get from some dealers that have a focus on silver, they talk about the same thing - but for silver.

Arguing a case is fine, but if someone wanted to use a currency backed by something else (Even if it's just abstracts, like a percentage of a particular industry or the ability to use a currency anonymously), or nothing except the power of faith, unicorns and following the rainbow - why not?

If market competition is fine anywhere else for libertarians, why not currency? I'd think this would be the place where competition should be encouraged with the most enthusiasm.

I am using a real shortcut - trying to get the idea across that it is whatever actors in a market decide it to be.

My guess? All money first started by two individuals agreeing to use it as such. Others found it (whatever the "it" was that the first two used) to be a pretty good vehicle, and thereafter it became "generally accepted."

In other words, before gold (or insert whatever) became a generally accepted medium of exchange, it was a medium of exchange between two people.

"It" has likely always been a commodity. The idea is that a person is trading something they have for something they want and the counter-party is doing the same thing. Martin Armstrong indicates that the earliest forms of money were likely sacks of grain or rice and then metal ingots.

Of course, we know some native cultures traded in shells, but as you say, the point is underlying the medium - it is not necessarily the medium itself. For instance, a person would not likely trade a shell for a cow unless they thought they could turn around and trade that shell for something else they needed like tanned leather or milled wheat (some shell collector might be an exception to the rule).

Fiat means any "by decree" and so fiat currency is whatever a ruler has determined. Historically, this has always been a way force taxation over capital. Technically, ingots or gold or whatever could be fiat currency.

The US silver dollar was based on the Spanish dollar at the time because it was widely considered to be of homogeneous weight and quality. Homogeneity matters with mediums of exchange and when that medium takes on a more subjective form such as paper currency, a scarcity of confidence rather than of physical material becomes the "backing".

A private currency could be "backed" by anything, with the only real test of the market being that people accepted it because they had confidence that other people would also accept it.

Yes, the market should decide which money(s) is used. Please, use whatever - land-backed paper, silver, diamonds, cigars, it's up to you.

That being said, gold makes the best money. Unlike silver, it does not tarnish. Unlike land-backed paper, you can't expand its supply at will via fractional reserve. Unlike diamonds, it's possible to split and recombine it without loss. How about bitcoin or one of its variants? Better security is needed: we should not hear about people simply walking away with bitcoins belonging to others, like if I'm not mistaken happened at Mt. Gox.

So I think this is the reason why so many libertarians default to a nongovernmental gold money.

I'm here to say "Thank you" for the reference. In it, Salerno mentions an example of free-banking in India which very closely resembled money market mutual funds. I've taken a lot of heat on LvMI and other sites for advocating the notion that deposits would / should convert to mutual funds in a free-banking environment, but didn't have any good references to backup the notion.